As you may have noticed, IFRS accounting is often not straightforward. Preparers frequently lose time digging through IFRS literature to decide how to account for a transaction. A few particularly grey areas would be:
- consolidate an entity or not (IFRS 10)
- equity versus liability (IAS 32)
- investment property or owner-occupied one (IAS 40)
- lease classification (IFRS 16)
- business combination or asset deal (IFRS 3)
After spending hours reading the standards and their interpretations, preparers must conclude something and make an accounting entry. It would seem that the work is now done, and the complicated issue resolved, but that's not always true. Because IFRS is principle-based, when a transaction needs careful analysis then usually the preparer has made some key judgements. And that means disclosures, disclosures, and disclosures.
IFRS requirements for disclosures of judgements
IAS 1.122 requires disclosures of judgements, excluding estimations, that the management made when applying the accounting policy. Must preparers disclose every judgement? Definitely not: IAS 1.122 stipulates that only those with the most significant effect on the amounts recognised in the financial statements need presenting. Such judgements could be called key/significant judgements.
Before we move on: why are estimations excluded? In fact, they are not—they are addressed by IAS 1.125. But for this article, we'll concentrate only on judgements that don't involve estimation.
Other IFRSs also require key judgements to be presented. For example, IFRS 12 requires preparers to disclose significant judgements made during the process of deciding whether the company has control over another entity.
How should significant judgements be presented?
The disclosures on key judgements can be presented in the relevant notes with a cross-reference from the accounting policies; or they can be included in a separate section of the financial statements, for example directly after the accounting policies.
The International Accounting Standards Board (IASB), as written in IAS 1.BC77, has stated that disclosing the most important judgements would enable users of financial statements to understand better how the accounting policies are applied and to compare entities on the basis on which managements make these judgements. Thus, the disclosure should be specific and written in plain language in order to help readers to understand the application of the policy.
For more information and examples, browse our Illustrative FS under Section 4A.
So, when you come across a complicated accounting issue under IFRS, check whether any disclosure of judgement should be presented in the financial statement. And keep in mind that only significant judgements should be presented! Then prepare your disclosures on judgements in an understandable way and allow yourself a small celebration.
Check this blog regularly: next time we will look at the disclosures requirements for estimates and assumptions!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.